From Hunger to Hope

By Alexander Eule

THE U.S. BOX OFFICE STAGED AN impressive turnaround in the first quarter, with ticket receipts jumping 23% to $2.58 billion, according to BoxOffice.com. Hunger Games drove much of the growth, but there are likely more hits on tap this quarter, including The Avengers, Men in Black III and Titanic 3-D.

After reeling through a disappointing 2011, shares of theater operators are back on track. At the Stock Alert, Cinemark (ticker: CNK) has always been our first choice among the multiplexers, thanks to the company’s international exposure. (The fast-growing Latin America film market now accounts for about a third of sales.) And with the U.S. box office recovering faster than many analysts expected, Cinemark looks even more attractive.

At yesterday’s close of $22.29, the stock is up 21%, since we last published a bullish Alert in January. But Cinemark still trades at a perplexing discount to rival Regal Entertainment Group (RGC), as well as its own historical valuation. At a five-year average P/E of 17, Cinemark shares would be worth $28. Add in the dividend yield of 3.8%, and Cinemark shares could post a total return of 30% in the coming year.

Since we first flagged Cinemark in January 2011, the stock has returned 33% versus the S&P 500’s 12%.

Cinemark is the third largest theater operator in the U.S., with 297 theaters in 39 states. In Latin America, the company has another 159 theaters in 13 countries. Last year, international revenue was up 23%, boosted by higher attendance and a 9% hike in ticket prices.

So despite the soft U.S. box office, total revenue still grew 6.5% last year, to $2.28 billion. Because international profit margins are lower, earnings fell 4%, to $144 million, or $1.24 a share. Profits could rebound 31% this year to a record $1.62. (Cinemark’s international customers pay about 25% less for tickets and concessions—for now.)

With debt to total capital at 44%, Cinemark has a far better balance sheet than Regal and smaller rival Carmike Cinemas (CKEC). That’s given the company the flexibility to upgrade its theaters, which, in the U.S., are now 100% digital. Better theaters should help the company take share, especially in the profitable 3-D category.

Even still, analysts continue to underestimate Cinemark’s potential. The company has beat top-line estimates in 11 consecutive quarters. The company, and the stock, have more positive surprises in store.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com